Fanning Company produces two products. Budgeted annual income statements for the two products are provided as follows.

   Required:

1. Based on budgeted sales, determine the relative sales mix between the two products.

2. Determine the weighted-average contribution margin per unit.

3. Calculate the break-even point in total number of units.

4. Determine the number of units of each product Fanning must sell to break even.

5. Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products.

6. Determine the margin of safety based on the combined sales of the two products.

Based on budgeted sales, determine the relative sales mix between the two products.

Determine the weighted-average contribution margin per unit.

Calculate the break-even point in total number of unit.

Determine the number of units of each product Fanning must sell to break even.

Verify the break-even point by preparing an income statement for each product as well as an income statement for the combined products.

Determine the margin of safety based on the combined sales of the two products. (Round your answer to 1 decimal place.(i.e., 0.234 should be entered as 23.4))

Product Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate

Elliott Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Elliott Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:

              Budgeted Volume (Units)            Direct Labor Hours Per          Unit Price Per Unit Direct Materials Per Unit

Pistons        5,000                                0.50                            $45          $ 8
Valves           12,500                                             0.30       17 3
Cams           1,500                                               0.20                              60                                  40

The estimated direct labor rate is $30 per direct labor hour. Beginning and ending inventories are negligible and are, thus, assumed to be zero. The budgeted factory overhead for Elliott Engines is $163,750. If required, round all per unit answers to the nearest cent.

a. Determine the plantwide factory overhead rate.

$____ per dlh

b. Determine the factory overhead and direct labor cost per unit for each product.

                  Direct Labor Hours Per Unit           Factory Overhead Cost Per Unit            Direct Labor Cost Per Unit

Pistons                 ____dlh                                           $____                                              $____
Valves                  ____dlh                                            $____    $____
Cams                   ____dlh                                           $____    $____

c. Use the information provided to construct a budgeted gross profit report by product line for the year ended December 31, 20Y2. Include the gross profit as a percent of sales in the last line of your report, rounded to one decimal place. Enter all amounts as positive numbers, except for a negative gross profit/gross profit percentage of sales.

                                                                                           Orange County Engine Parts Inc.
                                                                                   Product Line Budgeted Gross Profit Reports
                                                                                     For the Year Ended December 31, 20Y2

                                                          Pistons             Valves               Cams

Revenues                                             $____    $____    $____

Product Costs
Direct Materials                                    $____    $____    $____
Direct Labor                                         $                       $                       $
Factory Overhead                               $                       $                       $
Total Product Costs                              $ $ $
Gross profit                                          $                       $ $
Gross profit percentage of sales                 %                     %                      %

North Star is trying to determine its optimal capital structure, which now consists of only common equity. The firm will add debt to its capital structure if it minimizes its WACC, but the firm has no plans to use preferred stock in its capital structure. In addition, the firm’s size will remain the same, so funds obtained from debt issued will be used to repurchase stock. The percentage of shares repurchased will be equal to the percentage of debt added to the firm’s capital structure. (In other words, if the firm’s debt-to-capital ratio increases from 0 to 25%, then 25% of the shares outstanding will be repurchased.) North Star is a small firm with average sales of $25 million or less during the past 3 years, so it is exempt from the interest deduction limitation. Its treasury staff has consulted with investment bankers. On the basis of those discussions, the staff has created the following table showing the firm’s debt cost at different debt levels: Debt-to-Capital Ratio (Wd) Equity-to-Capital Ratio (Wc) Debt-to-Equity Ratio (D/E) Bond Rating Before-Tax Cost of Debt (rd) 0.00 1.00 0.0000 AA 5.0% 0.25 0.75 0.3333 A 6.0 0.50 0.50 1.0000 BBB 8.3 0.75 0.25 3.0000 BB 11.0 The firm has total capital of $5 million and 200,000 shares of common stock outstanding. Its EBIT is $500,000 and will not change if debt, at any of the levels shown in the preceding table, is added to the firm’s capital structure. North Star uses the CAPM to estimate its cost of common equity, . It estimates that the risk-free rate is 3.5%, the market risk premium is 4.5%, and its tax rate is 25%. North Star’s current beta, which is because it has no debt, is 1.25. Calculate the firm’s interest expense for each of the capital structures shown in the preceding table. (Wd) (Wc) (rd) EBIT Interest 0.00 1.00 5.0% 500,000 0.25 0.75 6.0 500,000 0.50 0.50 8.3 500,000 0.75 0.25 11.0 500,000

Laser Impressions Inc. manufactures color laser printers. Model J20 presently sells for $425 and has a product cost of $340, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $400 next year. Laser Impressions has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.
2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $8 per unit.
3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 42% of the factory overhead are related to running injection molding machines.

The direct labor rate is $25 per hour.

a. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places.
$ per unit

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$ per unit

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Garfield Company manufactures a popular brand of dog repellant known as DogGone It, which it sells in gallon-size bottles with a spray attachment. The majority of Garfield’s business comes from orders placed by homeowners who are trying to keep neighborhood dogs out of their yards. Garfield’s operating information for the first six months of the year follows:

Required:
3. Using the high-low method, calculate Garfield’s total fixed operating costs and variable operating cost per bottle. (Do not round your intermediate calculations. Round your variable cost per unit answer to 2 decimal places and fixed cost answer to the nearest whole number.)

Variable cost per unit: 8.83

fixed cost : 1420

4. Perform a least-squares regression analysis on Garfield’s data. (Use Microsoft Excel or a statistical package to find the coefficients using least-squares regression. Round your answers to 3 decimal places.)

coefficients

intercept:

X variable 1:

5. Determine how well this regression analysis explains the data. (Round you regression statistics to three decimal places and your percentage answer to the nearest whole number.)

6. Using the regression output, create a linear cost equation (y = a + bx) for estimating Garfield’s operating costs. (Round your answers to 3 decimal places.)

total cost = + (Number of bottles)

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $375 and has a total product cost of $300, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $360 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $8 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 40% of the factory overhead are related to running injection molding machines.

The direct labor rate is $25 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price is maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Target Costing

Laser Impressions, Inc., manufactures color laser printers. Model J20 presently sells for $175 and has a total product cost of $140, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $170 next year. Laser Impressions has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $4 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 45% of the factory overhead are related to running injection molding machines.

The direct labor rate is $13 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $150 and has a total product cost of $120, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $140 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $3 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 40% of the factory overhead are related to running injection molding machines.

The direct labor rate is $8 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price is maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Feedback

Target Costing

Laser Cast, Inc., manufactures color laser printers. Model J20 presently sells for $500 and has a total product cost of $400, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $480 next year. Laser Cast has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas:

Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.

Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $10 per unit.

Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 42% of the factory overhead are related to running injection molding machines.

The direct labor rate is $34 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price are maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.

Target Costing

Laser Impressions, Inc., manufactures color laser printers. Model J20 presently sells for $575 and has a total product cost of $460, as follows:

It is estimated that the competitive selling price for color laser printers of this type will drop to $550 next year. Laser Impressions has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost reduction ideas:

1. Purchase a plastic printer cover with snap-on assembly, rather than with screws. This will reduce the amount of direct labor by 9 minutes per unit.
2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by $12 per unit.
3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Thirty percent of the direct labor and 45% of the factory overhead are related to running injection molding machines.

The direct labor rate is $38 per hour.

a. Determine the target cost for Model J20 assuming that the historical markup on product cost and selling price is maintained. Round your final answer to two decimal places.
$

b. Determine the required cost reduction. Enter as a positive number. Round your final answer to two decimal places.
$

c. Evaluate the three engineering improvements together to determine if the required cost reduction (drift) can be achieved. Enter all amounts as positive numbers. Do not round interim calculations but round your final answers to two decimal places.